Loonie overvalued by 15.4 per cent: Big Mac Index

The last time The Economist released their Big Mac Index — a comparison of what McDonalds’ signature burger costs at its restaurants around the world and what that says about exchange rates — the Canadian dollar was estimated to be overvalued by 21.1 per cent.

That was in February, when the Canadian and U.S. dollar were at parity.

Since then, the loonie has declined to a marginally more export-friendly US$0.94-$0.97 range, but a Big Mac still costs more in Canada than it should.

According the July version of the Index — converted to U.S. dollars at the $0.95 rate — a Canadian Big Mac goes for $5.26 compared to $4.56 in the States.

Using the economic theory of purchasing-power parity (PPP), which argues that long run exchange rates should move toward a rate that equalizes the prices of goods and services in different countries, that means the Canadian dollar is overvalued by 15.4 per cent.

In other words, it’s slightly closer to where it should be.

The Chinese Yuan, on the other hand, is estimated to be undervalued by close to 43 per cent.

Even though The Economist warns the Index “was never intended as a precise gauge of currency misalignment”, some countries do take it quite seriously.

Writing in Slate in May 2012, Matthew Yglesias reported that the Argentine government — desperate to hide increasing inflation — had pressured McDonalds into charging more for a quarter pounder than it did for the larger Big Mac.

“The government knows it’s vulnerable to the wrath of the index,” Yglesias wrote. “To that end, the Argentine state leaned on Argentina’s McDonaldses to exercise restraint in their Big Mac pricing. That, in turn, has led the McDonaldses to radically de-emphasize the suddenly non-profitable signature sandwich in favor of the Triple Mac and other offerings.”